“The truth does not change according to our ability to stomach it.” -- Flannery O’Connor

It comes as shock to many employers that they may owe overtime to their highly paid consultants and experts. This happens when they engage scientists, engineers and other subject matter experts on a sporadic basis. Because they are not regularly employed, and are engaged to work only when needed, they are usually very well-paid, earning substantial hourly fees for their services. However, because they may be paid by the hour, rather than on a salary basis, they generally are classified as nonexempt employees under the Fair Labor Standards Act (“FLSA”).

Most employee must be paid on a salary basis to be exempt. Thus, a scientist or engineer or other consultant earning an hourly fee of $100 an hour, who works more than 40 hours in a workweek, will be due time and one-half overtime for the period in excess of 40 hours – this comes to $150 an hour in our example. It doesn’t matter that they have a PhD from Harvard, if they are paid by the hour, they are likely nonexempt. The FLSA white-collar exemptions require payment of a salary plus exempt duties. Knock away the salary basis of compensation, and they are just another nonexempt worker.

And just when you think it can’t get worse, it does. It goes downhill if the employer is a US Government service contractor. Then the contract may be covered by the Service Contract Act (“SCA”) which requires nonexempt employees be paid prevailing wages and fringe benefits. If the SCA adopts the white-collar Part 541 exemption tests of the FLSA, and thus, if the scientists are paid by the hour, and are nonexempt, then the scientist must be paid SCA wages and fringe benefits.  Of course, usually the prevailing wage is not an issue with these highly paid consultants. But it may still require some kind of conformance process, because there are no listed scientific jobs on the wage determination. And what about the health and welfare requirements, vacation benefits and holidays? Do you offer vacations, paid holidays, health insurance and a 401(K) to your part-time sporadically engaged but highly paid consultants? And what about the Executive Order sick leave requirement? If the scientists are nonexempt, they would be entitled to sick leave and all these SCA benefits or a cash equivalent that must be separately paid from the wages.  Employers cannot just pay more wages than required under the SCA. You need to separately discharge the fringe benefits requirements.  

And don’t imagine you can evade these requirements by simply calling the worker an independent contractor. While they may indeed qualify for that status, it still requires a separate examination and determination. And don’t expect the Department of Labor to agree with you. Moreover, if they are covered by the SCA, then it may not matter, since the SCA applies to all service workers engaged to work on the contract regardless of contractual relationship.

This may not be a problem with full-time workers, but when employers hire consultants on-call, or on a one-off basis, or just sporadically as needed, they need to evaluate the wage and hour ramifications of their compensation methodology. It is going to be a fact specific examination. Some consulting professionals, like lawyers, doctors, teachers in academic institutions, workers in the video or filmmaking industries, computer employees, and those executives who own a 20% equity interest in their own independent business, may be excepted from the salary basis test. Accordingly, they can potentially be hired and paid by the hour. Others, however, need to be paid overtime, and thus their hours of work must be carefully monitored on controlled. And those who work on US Government service contracts, may need to receive a supplemental cash equivalent payment for their fringe benefits for every hour worked, and thus their wages and fringe benefit payments need to be calibrated with this in mind, and fringe benefit cash outs should be separately noted on the invoicing and payment vouchers.

In short, there is a tooth fairy even for highly compensated workers under the FLSA and SCA. Indeed, while the FLSA has a relaxed exemption duties test for highly compensated workers who earn annual compensation of $100,000, even that exemption still requires payment on a salary basis. Pay by the hour, unless it is one of those excepted occupations noted above, and by definition your workers are likely nonexempt.